Over the past two trading days the action has been very typical of the type of activity one would expect following such a monumental rally as that which took place on Wednesday. The range narrowed as anticipated, and volume was also slightly lighter overall. The upside in the morning was a bit more than I had been looking for, but the strong opening gap merely served as stronger exhaustion to help turn the market around and pull it back into the 15 minute trading range from the previous session.

The afterhours buying had begun in the late evening in the futures market with a sharp upside spike into 20:00 ET, but the spark of buying was short-lived and the market congested into the early hours of the next morning. At about 3:30 am ET the bulls once again materialized and the indices slowly climbed higher ahead of the open. By the time the opening bell had rung the Dow was back at previous daily highs, while the Nasdaq Composite and S&P 500 also hit price resistance on the daily time frame.

Extreme gaps, such as the one on Friday morning which take place in the direction of the trend heading into the gap, have a very difficult time sustaining themselves and are more readily prone to failure. Often the highs are made within the first 15 minutes of trading, just as they were this time around. The tech-heavy Nasdaq had the most difficult time holding onto gains out of the open. Dell Inc. (DELL) had not faired well on earnings and a diminished forecast. The outcome was a significant gap lower into the open, while August's lows serving as price resistance after the Dow dropped under that level into the open to establish a new 6-month low in the process. This offset some of the gains attributed to the hope that continued indications of a weakening economy will leave to a Fed rate cut this month.



After moving lower into 10:00 ET, the indices congested for about half an hour before the selling resumed around 10:45 ET. The trend was steady as the S&Ps and Dow made their way into the previous 15 minute highs and 15-minute 20 period simple moving average support. These hit at the 11:15 ET reversal period, but the market had a difficult time rounding off at the support and only managed to pull slowly higher into the 5-minute 20 sma before again breaking lower out of a 5-minute bear flag at noon. This took the Nasdaq back into Thursday's lows and slightly lower lows on the 5-minute time frames created a form of double bottom which trapped sellers.



Despite the reversal pattern, the momentum was unable to shift intraday. The upside remained substantially weaker than the downside within the early afternoon trading. This created more of a strong range along support than anything else before the indices gave way to selling at the 15:00 ET reversal period, increasing in momentum into the 15:00 ET one. The lower end of that 15-minute trading range in the Nasdaq we have been looking at held as support in that index, while the gap closure in the S&Ps and Dow served as support in those markets. The S&Ps and Dow, which had held up rather well compared to the Nasdaq, built up momentum for a strong push higher into the close, leading to gains in those two indices, while the Nasdaq closed lower.



The Dow Jones Industrial Average ($INDU) rose 59.99 points on Friday, closing higher by 0.5% at 13,371.7. For the week as a whole it rose 2.9%, although it remained 4% under the closing prices from the end of the previous month. 2/3 of the Dow's components posted gains on Friday with JP Morgan Chase Co. (JPM) as was one of the strongest. It closed higher by 4.5%. The S&P 500 ($SPX) rose 11.42 points, or 0.8%. It closed at 1,481.14 with a gain of 2.7% on the week and a loss of 4.3% on the month. The Nasdaq Composite lost 7.17 points, or -0.3%. It was trading at 2,660.96 into the bell. It had risen 2.4% throughout the course of the week, but had a rather extreme loss of 6.9% on the month as a whole.

In Friday's morning column I had made a reference to the late afternoon action in the indices as a whole and compared it to the daily time frames. The follow-through on it had been the choppier upside into Thursday's close. While the momentum is slightly stronger on this setup on the daily than on the 5 minute version, I am still expecting a very similar follow through with a great deal of the more choppy daily sessions with stronger overlap from one day to the next in terms of the index prices. I am also watching for a slightly higher high in the S&Ps and Dow on the weekly time frame to continue to create the conditions that would be favorable for a stronger price reversal and correction into the early half of 2008. We are still a number of week out, however, so we shall have to wait to see how this continues to play out as the market tries to pull higher into that upper trend channel resistance on those larger time frames.

Toni Hansen is President and Co-founder of the Bastiat Group, Inc., and runs the popular Trading From Main Street. She can be reached at Toni@tradingfrommainstreet.com.